The credit market for home purchases is making a rebound in Houston as mortgage lenders slowly trickle back into the game.

Years of lending decline since 2008 have left the home-purchase loan market in Houston a shadow of what it once was. But in 2012, local home sales surged 29.1 percent, boosting residential real estate lending for several local banks, while mortgage refinancing also picked up steam.

Lenders say sustained low interest rates, relatively steady home-value appreciation and Houston’s healthy job-creating economy unleashed pent-up demand for home-purchase and mortgage-refinance loans last year, and that 2013 has already seen an acceleration of those market forces. That could mean the local housing market is finally on the way to a full recovery after a rocky five years.

“We’re probably in the sweet spot of the U.S. right now,” said Robert Wiggins, president at Houston-based Patriot Bank Mortgage. “For the (home) purchase transaction market, 2012 was probably one of the best years in a long time.”

That doesn’t necessarily mean buyers are having an easy time in Houston — it’s still a seller’s market, as home prices have risen and inventory has shrunk to levels not seen in over a decade. The shortage of lot availability for new homes is keeping the local financial market from overheating, as rapid construction in high-demand areas isn’t possible, but that’s no excuse to let our guard down, lenders say.

“When you get into a market like we have now, where everyone is smiling and saying, ‘Oh, this is great,’ sometimes that’s when you have to stop, take a deep breath and say, ‘It’s business,’” Wiggins said. “We should always have a measure of caution with everything that we do. We can be positive and relish in the good numbers, but good judgment is always needed.”

Mortgage lenders still make far fewer loans than they did during the go-go days of 2006. In 2011, the most recent year for which data is available, home-purchase loan origination in the Houston area plummeted 68 percent from the peak year of 2006.

Meanwhile, the amount of credit for home purchases in the market dropped 48 percent to $10.6 billion over the same period, according to Arlington, Va.-based Compliance Technologies’ Lending Patterns database of federal Home Mortgage Disclosure Act filings.

Of course, 2006 was anything but normal.

Toxic Turmoil

In those heady days, mortgage lending across the U.S. soared, and housing prices rocketed past historic norms, especially in high-demand areas such as Phoenix, Las Vegas and San Jose, Calif., fueled by subprime lending.

Houston saw appreciation, too, but more in line with historically normal 3 to 4 percent annual increases.

Compounding the situation was the fact that The Federal Reserve in 2005 began raising interest rates to cool the pace of economic expansion. But investors were scooping up subprime debt with glee. Everyone was making money — until the music stopped.

Subprime borrowers began defaulting on their loans at extremely high rates: Some weren’t able to make the first payment. These were loans that should have never been made, were poorly underwritten and for which investor demand dried up almost overnight, said Greg McBride, a senior financial analyst at North Palm Beach, Fla.-based BankRate Inc.

“It’s like turning on a kitchen light and the cockroaches scattered,” McBride said. “If there’s no appetite for the debt, there’s no avenue for the lender to unload it, then there’s no credit available.”

Home prices sputtered, and homeowners were no longer able to easily refinance their way out. Financial markets were in toxic turmoil because the subprime mortgage debt was spread far and wide — and ultimately, credit markets started to seize up, starving the U.S. economic engine and spilling into the sharpest downturn the country had seen since the Great Depression.

Although the country is trudging through a slow recovery, there are still pockets of the U.S. that have a large foreclosure backlog to work through, McBride said. One early Houston casualty among the hundreds of bank closures across the country came when Franklin Bank Corp. failed in late 2008, its financial losses tied to developer and consumer mortgage loans in Arizona, California and Florida.

But in the end, Houston and other Texas markets weren’t hammered nearly as hard as some areas of the U.S., such as California, Nevada, South Florida and other coastal areas. Tighter credit standards across the state guarded Houston against a large housing price boom before 2006, and relatively smaller demand for homes kept prices from falling too far.

“In retrospect, the 1980s could have formed the foundation for a well-managed real estate economy within Houston and within the state,” Wiggins said, referring to the Texas banking crisis that pushed regulators to pull the reins on home equity and other forms of mortgage lending. “We haven’t changed our view. We do everything with a lot of caution. Maybe that just comes out of seeing a few business cycles. I think it’s the prudent thing to do.”

But it isn’t just the home-purchase credit market that has felt a jolt.

Home-refinance loans have built back up at an even quicker pace as consumers take advantage of historically low interest rates, making refinancing a much larger portion of the total mortgage loans in the Houston market, up to 54 percent in 2011 from 25 percent in 2006.

Refinancing Rush

Since the credit market battering in 2008, the number of refinance loan originations in Houston climbed 90 percent to more than 57,000 in 2011, representing $11 billion in credit to the market. That’s a 117 percent increase since 2008.

The market for large home loans is up, too, lenders say.

“I’ve been in this market since 1984, and this is as strong of a beginning of a market I’ve ever seen,” said Randy Stewart, president of Amegy Bank Mortgage, noting that the company’s business for the first two months of 2013 is up 40 percent year over year.

“And the amazing part is, we had a lot of the growth in Houston in the first-time homebuyer market,” Stewart said. “As we all know, that segment of the market still has a lot of challenges to get as many folks approved. This time, which is dramatically different from the last time we had big growth in that segment, the market for luxury homes — $500,000 and up — is on fire right now.”

San Francisco-based Wells Fargo & Co. (NYSE: WFC), the top mortgage lender in Houston, saw about 30 percent of all home-purchase loans made by first-time homeowners, an increase that made for an active 2012, said Spiro Petritsis, Houston area sales manager for Wells Fargo.

“Houston is a market with a lot of relocation taking place,” he said. “People are coming here seeking new employment or getting transferred with their companies. That creates additional momentum for home purchasing. That’s what makes Houston so unique and so powerful.”

Anatomy of a Financial Meltdown

2000-2004Median U.S. home prices triple, fueled by low interest rates and subprime lending.

2004Homeownership peaks to all-time high.

2005The Federal Reserve begins steadily raising interest rates as a measure against inflation, making it more expensive to borrow for home purchases, and ultimately slackens the demand for mortgage loans.

2006-2007Mortgage lending in Houston peaks in 2006, but the national housing bubble bursts in 2006 and 2007. Home foreclosures begin increasing rapidly as consumers can no longer afford monthly interest payments. Home prices across the U.S. fall, along with construction of new homes.

2007Mortgage foreclosures skyrocket 87 percent over the previous year across the U.S., according to Bloomberg. Home sales plummet. As mortgage-backed securities become unstable, investor demand dries up, leaving lenders without many options to unload the debt. Subprime lenders begin collapsing across the country.

2008-2009The stock market nose dives. The collapse of Lehman Brothers Holding Inc. spurs a global financial crisis. The federal government passes legislation to spend more than $700 billion on a program to save financial institutions from collapse.

2010-2013 Slowly, the national economy recovers. Banks boost credit requirements for mortgage borrowers. The Federal Reserve slashes interest rates to record lows. The housing market begins to come back. In the fourth quarter of 2012, U.S. banks made only 156,773 home foreclosures, the lowest number since the first quarter of 2008, according to the Office of the Comptroller of the Currency.

Volleying for Position

The roster of the most-active mortgage lenders in Houston has changed dramatically since 2006, when lenders hit their peak year before the mortgage meltdown.

Several major players in 2006, mostly those with high exposure to the subprime market, declared bankruptcy or were acquired. For example, Irvine, Calif.-based specialty finance company New Century Mortgage Corp., the third most-active mortgage lender in Houston in 2006, filed for Chapter 11 bankruptcy in 2007. Meanwhile, the most-active mortgage lender in Houston in 2006 — Calabasas, Calif.-based Countrywide Home Loans Inc. — was acquired by Charlotte, N.C.-based Bank of America in 2008.

Sioux Falls, S.D.-based Wells Fargo Bank has become the largest home lender in the U.S., taking the top spot in Houston and most other markets, as well. The three largest banks in the U.S. are now the three largest mortgage lenders in Houston. The new landscape of players may now be more stable than in 2006, as big banks have turned conservative on credit requirements.